U.K. Disposable Income Plunges as Economy Contracts 0.3%

London-based J Sainsbury Plc, the U.K.’s third- largest supermarket company, said June 13 sales growth slowed in the first quarter as a soggy start to the summer led to fewer barbecues during three-day weekends. Photographer: Chris Ratcliffe/Bloomberg

June 28 (Bloomberg) -- Britons’ disposable income fell for
a second quarter in the first three months of the year, when
consumer spending unexpectedly declined and the economy shrank.

Real disposable income dropped 0.9 percent from the
previous three months, when it also fell by that amount, the
Office for National Statistics said today in London. Consumer
spending was revised to a 0.1 percent decline from a 0.1 percent
increase, while gross domestic product fell 0.3 percent.

The Bank of England is edging closer to resuming bond
purchases to kickstart a recovery as the euro-area debt crisis
worsens and the U.K. struggles to shake off a recession. With
consumers confidence under pressure, Chancellor of the Exchequer
George Osborne this week scrapped a planned fuel-duty increase,
his fourth policy U-turn in a month, a move he said was aimed at
helping people at a “very difficult economic time.”

“It looks highly questionable whether the economy has been
able to return to growth in the second quarter,” said Howard
Archer, an economist at IHS Global Insight in London, citing
“intensified problems” in the euro area. The economy may begin
to recover after that, helped by “ultra accommodative monetary
policy,” he said.

The decline in GDP matched a previous estimate published
last month and the median forecast of 29 economists in a
Bloomberg survey. The pound was little changed against the
dollar after the data were released. It traded at $1.5538 as of
10:51 a.m. in London, down 0.2 percent from yesterday.

Consumer Spending

The decline in consumer spending in the first quarter
followed a 0.5 percent increase in the October-December period
and declines in the preceding three quarters. Real disposable
income is now at its lowest in three years. The savings ratio
declined to 6.4 percent from 6.9 percent, the lowest in a year.

London-based J Sainsbury Plc, the U.K.’s third-largest
supermarket company, said June 13 sales growth slowed in the
first quarter as a soggy start to the summer led to fewer
barbecues during three-day weekends.

Mulberry Group Plc, a British luxury-handbag maker, said on
June 14 that it remains “cautious” on the outlook because of
the “adverse macro-economic climate.” Retail-sales growth
slowed to 12 percent in the 10 weeks since the end of March from
36 percent in the last fiscal year, the company said.

Exports Drop

Today’s report also showed that exports dropped 1.7 percent
in the first quarter and imports fell 0.3 percent. Government
spending increased 1.9 percent.

Production fell 0.5 percent in the quarter through March,
revised from a 0.4 percent decline, the statistics office said.
Construction was revised to a 4.9 percent decline from 4.8
percent, while services grew 0.2 percent, more than the 0.1
percent previously estimated.

The debt crisis in Europe, Britain’s biggest trading
partner, is weighing on growth, as are tighter lending
conditions as banks grapple with higher funding costs. European
leaders will gather for a summit in Brussels today to seek a
resolution to the debt turmoil as governments clash over issues
such as euro bonds.

“This tightening in financial conditions has affected
demand in the economy,” Bank of England policy maker Ben
Broadbent said in his annual report, published on June 26. The
outlook is that “output is broadly flat in the next quarter or
two, as it has been for the past eighteen months.”

Broadbent was among a majority of policy makers who voted
this month to leave the central bank’s bond-purchase target at
325 billion pounds ($505 billion), defeating a push by Governor
Mervyn King and three other officials to increase it. The bank
announces its next policy decision on July 5.

Fiscal Squeeze

The government’s fiscal squeeze is also hampering demand.
While the opposition Labour Party has accused the coalition of
dragging the U.K. into a double-dip recession, Prime Minister
David Cameron says the plans are supporting the economy by
holding down borrowing costs.

The budget program came under attack this week after data
showed Britain had a larger budget shortfall than economists
forecast in May as the recession hit taxes and pushed up welfare
spending. Osborne this week scrapped a planned increase in fuel
duty due to take effect in August.

In a separate report, the statistics office said business
investment rose 1.9 percent in the first quarter from the
previous three months and was up 14.8 percent from a year
earlier. The balance of payments report showed that the current
account deficit widened to 11.2 billion pounds from 7.2 billion
pounds in the fourth quarter of 2011.